Property repair and reconstruction following insurance claims are being impacted by raw materials and labour shortages, according to a new report from loss adjuster Woodgate & Clark.
Woodgate & Clark Chief Surveyor Phil Howlett said overall material and wage costs were 19.6% higher in September 2021 than 12 months earlier, according to the latest BCIS figures. Reported tender costs are also increasing beyond this level with builders and contractors anticipating contractual delays due to material shortages together with further material prices rises. Profit margins are being uplifted due to lack of competition.
Mr Howlett said labour rates have increased as a result of demand outstripping labour supply. Most trades have increased their rates due to being overwhelmed with work and a shortage of skilled trades. A number of Eastern European workers have left the UK as a result of Brexit and this has hit the South East of England in particular.
Looking ahead, he said total construction costs, not just materials, are predicted to continue to rise significantly. “The trend appears to be a rapid rise continuing throughout the rest of 2021 and into the first half of 2022 with the rate of increase levelling out in the second half, resulting in an overall increase of at least 30%. A retraction in costs may happen at some point as work available diminishes, new organisations enter the market and supply chain problems are resolved but we don’t anticipate a return to pre-2021 levels.”
He said: “This is a significant challenge to the commercial claims profession, so we must collaborate and apply our collective professionalism and experience to ensure that the costs are managed transparently and any attempt to take advantage of the climate is identified and prevented.”
He explained that factors affecting the construction industry will impact consequential losses (i.e., business interruption (BI), alternative accommodation, loss of rent), so “we are exploring alternative repair options to mitigate the total claim costs and not analyse building costs in isolation.”
“For example, it may be beneficial for the overall claim costs to adopt a more expensive repair option if this will achieve a significant reduction in a BI indemnity period.”
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Mr Howlett said the research found several reasons behind soaring costs for repairs.
· Individuals having more disposable income due to Covid preventing foreign holidays, particularly in respect of domestic projects and cosmetic refurbishment.
· Reduced manufacturing capacity due to furlough and self-isolation
· Shipping difficulties in respect of COVID restricting movement of goods, ports, quarantining etc.
· Delivery of goods, due in general to a shortage of lorry drivers but also furlough, self-isolation and travel restrictions
· Increase in demand, rapid increase in new construction, at its fastest rate in over 24 years with output growth at its strongest since September 2014
· Existing shortage in labour force, especially skilled, further exacerbated by Brexit and COVID 19 travel restrictions
· Operational costs encountered as a result of social distancing, furlough and self-isolation
· The rise in DIY activity during lockdown has also led to shortages of materials such as fencing, decking, sand and cement
He said: “Brexit is a key factor as 60% of imported construction materials into the UK come from the EU. Changes in the way these are being brought into UK has also contributed to the delays, shortages and price increases.”
Mr Howlett explained that Woodgate & Clark has boosted its approach to building restoration after insurers have accepted liability.
“Our adjusters have been fully briefed on supply challenges, and are alive to the risk of delay, scope creep and inflated prices. For large losses, our adjusters work hand in hand with Woodgate & Clark’s specialist engineering and surveying team to validate the lowest tender and negotiate improved rates for costs that are considered to be overstated”.
“We actively seek pre-ordering of materials where required at an early stage to ensure availability is as secure as possible and that prices are held. We are happy to endorse early additional of funding of contracts in this way”.
He added: “At present we ask Policyholders’ consultants and contractors to supply fixed costs at tender stage, to avoid contingencies and minimise provisional sums for our clients. However, we are aware that the Construction industry is now seeking the re-introduction of fluctuating price contracts.”
For low value claims, he said experienced adjusters survey the damage and agree the scope of repairs covered by the policy. “Competitive tenders are obtained on the basis of the agreed scope of works, and we make sure ancillary works beyond the scope of the policy are excluded from the claim.”
For all claims, Mr Howlett said: “We consider the combined effect of tender value, lead in time and contract period on the overall cost of the claim to include any business interruption and alternative accommodation/loss of rent.”
He commented: “We are working closely with our clients, and this report has been designed to advise insurers how we are helping to reduce unnecessary repair costs”.